Using an investment account such as a 401k to purchase a home can be done, but it is a decision that I recommend you think through.
First, let me open this article by saying,
“Buying a home is one of the largest most important financial decisions you will make in your life, and your strategy matters more than ever. I do not recommend leveraging your investment assets to purchase a home without first having me run the numbers for you and then second, running it by your financial planner. Each decision surrounding your home purchase should be evaluated to make sure that it fits within your short-term and long-term financial goals.”
THE 2 WAYS TO USE YOUR 401K FOR A DOWN PAYMENT
(1) A 401k Loan
(2) A 401k Hardship Withdrawal
SHOULD YOU USE YOUR 401K FOR A DOWN PAYMENT?
The IRS looks at 401k assets as long-term investments, and therefore, accessing 401k assets can be risky business due to the potential tax and penalty consequences. Of the two options above, the most common and “safe” approach to accessing 401k assets to purchase a home is through a 401k loan.
A 401k loan is less costly. You simply forgo earnings on the amount borrowed, and pay back the amount borrowed at the rate you were earning the money. From a mortgage pre-approval standpoint, you also need to remember that your 401k loan will be added to your liabilities, increasing your debt-to-income ratio. I help each one of my clients evaluate their situation on a case-by-case basis, so it is hard to say, “One size fits all here“.
WHAT ARE THE RISKS?
The major risks outside of paying fees for a 401k loan, is that in the event you lose your job or change employers, you may be required to pay back the loan entirely within 60 days. The loan may now be treated as a withdrawal and you are subject to fee, penalties, and tax consequences.
As for a hardship withdrawal, I will first advise you to speak to your tax professional and investment advisor in addition to listening to me. With a 401k Hardship Withdrawal, you pay taxes, penalties, and forgo any future earnings on the money you withdraw. As I mentioned previously, the safest approach to accessing 401k assets is through a 401k loan, but it is wise to consider both options as you research the best financial strategy buying a home.
CONSIDER THE FOLLOWING BEFORE USING YOUR 401K TO BUY A HOME
(1) Contact a real estate professional to evaluate “real time” market stats in your community
(2) Contact a tax professional to see the “Total Cost” of a withdrawal
(3) Contact your 401k investment bank for their guidelines on 401k withdrawals and loans
(4) My best advice – Consider asking a relative, friend, or employer to “gift” you the money for a down payment versus taking a costly loan or hardship withdrawal. Interest paid is money lost!
It is important that you contact your 401k provider to request their “re-payment terms” and apply for the loan or withdrawl prior to submitting an offer on a home. Often times it can take 4-6 weeks for your bank to issue you a check or wire transfer.
I hope this information is helpful! If you want to learn more about me and getting a home loan with the Dan Keller Team at Guild Mortgage, I’ve provided more information below that can help you choose the right mortgage lender:
THE PERFECT LOAN PROCESS W/ DAN KELLER
GET PRE-APPROVED WITH DAN KELLER
We make it easy. I encourage each of my clients to reach out to me through email or phone call to have an initial mortgage planning discussion surrounding your current situation, goals/budget, and timeline. There are so many additional factors that go into qualifying for a Home Loan today, it’s important that you are working with a professional that understands the ins and outs of the process and current market trends.
To apply for a Home Loan, visit my Mortgage Concierge Page and follow steps one and two.
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Buying a home is the largest financial decision is the largest financial decision you'll make in your life.
Who you have managing that process is more important than you know.